Does Taiwan Environment Scientific (GTSM:8476) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Taiwan Environment Scientific Co., Ltd. (GTSM:8476) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Taiwan Environment Scientific

What Is Taiwan Environment Scientific's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Taiwan Environment Scientific had NT$561.6m of debt, an increase on NT$500.1m, over one year. However, it also had NT$155.1m in cash, and so its net debt is NT$406.5m.

A Look At Taiwan Environment Scientific's Liabilities

According to the last reported balance sheet, Taiwan Environment Scientific had liabilities of NT$625.3m due within 12 months, and liabilities of NT$248.8m due beyond 12 months. Offsetting this, it had NT$155.1m in cash and NT$361.3m in receivables that were due within 12 months. So its liabilities total NT$357.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Taiwan Environment Scientific is worth NT$1.25b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Taiwan Environment Scientific's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Taiwan Environment Scientific reported revenue of NT$525m, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Taiwan Environment Scientific produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$34m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$71m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Taiwan Environment Scientific is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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